The Five Generational Transformations of Successful Family Enterprise

The Five Generational Transformations of Successful Family Enterprise

Dennis T. Jaffe

February 24, 2018

Only a small number of family fortunes survive more than a single generation. I have interviewed more than 70 global families who have thrived over three or more generations. These businesses have experienced significant transitions over generations. None of these business families are what they were in the first generation. From one family they are now group of related families; more than half have sold or diversified beyond their legacy business.

Despite their great diversity, I see a common transformation over the generations, and I feel strongly that this trans-formative process, the deep shift of the original family culture and mindset, characterizes those few family enterprises that successfully reach the third and later generations. These mindset shifts in turn lead the family to innovate not just in what business they are in, but to change how they make decisions, engage family members and develop the next generation of family leaders. In the first generation of a business family, things can be informal and improvisational, but as the family and business grows, the family has to redefine the way they do things. To succeed the great changes internally within the family (more members, more diverse values and desires) and externally in the global environment, make it necessary for families to follow the following path of cultural development:

The overall transformation that takes place in successful families contains five key elements. Combined, they allow the family enterprise to shift from a single legacy business with a single leader, to a portfolio of ventures that are able to adapt and change with new opportunities, under the active stewardship of multiple family owners.

1. From acquiring to stewarding wealth

In the space of perhaps a few years, a family has acquired more wealth than anyone ever anticipated. The successors grow up with the reality of having wealth. The focus of the family after the first generation shifts into two areas—sustaining the wealth created by the founder, and using it wisely and thoughtfully for the goals they set. This shift means that the family now has to consider the purpose and use of the wealth they acquired. What do they want to accomplish for the next and future generations? How can they use it? When can it be accessed, and when reinvested? These are value questions that involve not just a single family leader, but the growing number of family members, who may have diverging values, needs and desires. Unless a family collectively addresses their purpose, they can find themselves uncovering a difficult conflict about how to use and continue to generate wealth. The family has to resolve its diverging differences, or else make provisions to divide the wealth and separate as a unified family enterprise.

2. From family first to business first

The wealth creator makes the rules and the decisions often without consulting anyone. There is no need to consult others. This paternalistic style is fine when the next generation is young and dependent, but as they grow up, family members want to know what to expect and how they can participate. In addition, in the first generation family and business are intertwined.

As the family moves into the next generation, there are key non-family executives, and there are more family members than the business can use. The family has to define more clearly what qualifications family members need and make sure that family decisions—to hire, compensate and promote—do not harm the business. Many families in my study reported that they needed to put in business policies where none existed or even to fire a family member. On the short term this produced hurt feelings, but in the larger scale it sent a message that family members had to think of what the business needed, not what the business offered them. In order for the family to thrive because of the profits of the business, the business had to be placed on a firm professional footing.

3. From family business to business family

Very few of the successful families were in the same business they were a generation ago. More than half of the families had sold the legacy family business, and others had gone public or taken on other investors. From a single business, the family now had a portfolio of investments. They often had a family office, a business they owned and operated, a foundation and other investments. The skills to manage a diversified portfolio are not the same as those to manage the legacy business, and the family had to see itself as having multiple investments rather than a single business. The business family had to think of how they were creating new wealth for the family.

4. From “me” to “we”

Originally one person (sometimes a pair) run the business for the family. Even if one family member is selected as the next generation business leader, his or her relationship with the rest of the family is not the same as that of the business founder. Their siblings and cousins are also their shareholders, and they are responsible to this group. So the skills of family leadership include the capacity to engage the rest of the family, to communicate, to get ideas and listen to the diverging ideas of family shareholders. The family needs to create formalized opportunities to share business and financial information, and to be open to new ideas.

5. From implicit to explicit policies and practices

The business founder holds a lot in his (or her) head. They have a network of relationships, they understand an ambiguous business structure, and they follow opportunities. Other family members do not know how things are done or what is happening. Moving into a new generation, the business founder has to communicate to his successors, the rest of the family, what the policies and practices are. The family has to define policies to that each family shareholder knows what to expect. When you are a family owner, for example, what can you expect? Will you get a regular check for profits, or will the profits be reinvested or given away, or are there no profits at all?

After a successful wealth generating generation, the successful family has to make a dramatic shift of focus that engages all family members, and leads to difficult questions, shifts of activity, high engagement and often a new direction and style of governance. If a family does not make the above shifts, they are at risk to see their wealth diminish and they are not taking advantage of the opportunities that wealth can bring to a family.